G-8 Says Recovery Is Too Weak to Withdraw Stimulus

By Helene Fouquet and James G. Neuger

July 9 (Bloomberg) -- Group of Eight leaders said the economic recovery from the steepest recession since World War II was too fragile for them to consider reversing efforts to pump money into the economy.

President Barack Obama pressed for the door to remain open to more stimulus measures as a renewed stock-market drop stirred concern that $2 trillion spent worldwide so far hasn’t jolted consumers and businesses back to life.

“The G-8 needed to sound a second wakeup call for the world economy,” British Prime Minister Gordon Brown told reporters yesterday in L’Aquila, Italy, after the opening sessions of the leaders’ annual gathering. “There are warning signals about the world economy that we cannot ignore.”

Divergences over what to do next and calls from developing nations to do more to counter the slump underscored the G-8’s limited room for maneuver. The biggest borrowing spree in 60 years has failed to halt rising unemployment and left investors doubting the strength of the recovery. The MSCI World Index of stocks slid for a fifth day. The 23-nation index has dropped 8 percent since a three-month rally ended on June 2.

“We’ve been advocating stimulate now, consolidate later,” Angel Gurria, secretary general of the Organization for Economic Cooperation and Development, told Bloomberg Television today from the summit. “You’re not going to remove the stimulus now. It’s too early.”

IMF Forecasts

The International Monetary Fund echoed that skepticism, upgrading its 2010 growth forecast while saying the rebound will be “sluggish” and urging governments to stay the economic- stimulus course.

Emerging countries like China will lead the way, expanding 4.7 percent next year, the IMF said yesterday, up from an April prediction of 4 percent. The Washington-based lender forecast growth of 0.6 percent in the advanced economies, up from expectations of stagnation.

“It’s a very volatile situation,” European Commission President Jose Barroso said in a Bloomberg Television interview in L’Aquila. “We are not yet out of the crisis, but it seems now that the free fall is over.”

In the U.S., a jump in the jobless rate to a 26-year-high of 9.5 percent in June and a 6.9 percent drop in the Standard & Poor’s 500 Index in the past month raised questions whether Obama’s $787 billion stimulus package is turning the world’s largest economy around.

Democrats in Congress are split over whether to spend more, adding to a deficit that the IMF puts at 13.6 percent of gross domestic product in 2009, the highest since World War II.

‘Potentially Counterproductive’

Obama has straddled the issue, telling ABC News this week that spending more borrowed money is “potentially counterproductive.”

A G-8 statement yesterday embraced options ranging from the second U.S. stimulus package some lawmakers and economists are advocating to Germany’s emphasis on shifting the focus to deficit reduction.

“Exit strategies will vary from country to country depending on domestic economic conditions and public finances,” leaders of the eight economies -- the U.S., Japan, Germany, Britain, France, Italy, Canada and Russia -- said in the statement.

“There is still uncertainty and risk in the system,” Mike Froman, deputy U.S. national security adviser, told reporters in L’Aquila. While exit strategies can be drawn up, it’s not “time to put them into place.”

Bank bailouts and recession-fighting measures will explode the debt of the advanced economies to at least 114 percent of gross domestic product in 2014, the IMF forecasts.

‘Exit Strategy’

German Chancellor Angela Merkel is the leading opponent of additional stimulus, pushing through a statement at last month’s European Union summit that called for “a reliable and credible exit strategy.”

Merkel, campaigning for re-election in September, has warned against billowing budget deficits, which will rise in the EU to an average of 6 percent of GDP in 2009 from 2.3 percent last year, the EU forecasts.

“We have to get back on course with a sustainable budget, but with the emphasis on when the crisis is over,” Merkel said.

The 16-nation euro economy has shown some signs of resilience since shrinking 2.5 percent in the first quarter, the most since the currency’s birth in 1999. While measures of business confidence, manufacturing and services have ticked up, job cuts by companies from Austrian Airlines AG to ThyssenKrupp AG pushed up unemployment to 9.5 percent in May, a 10-year high.

Asian Resilience

Further signs of a resilience also emerged in the Asia- Pacific region, where governments including China and Australia have boosted spending to increase economic growth. Australia’s jobless rate rose in June by less than forecast, climbing to 5.8 percent from 5.7 percent, a report showed today. Analysts tipped a 5.9 percent rate.

In China, new loans rose almost fivefold in June from a year earlier to 1.53 trillion yuan ($224 billion), the central bank said on its Web site yesterday. China’s passenger-vehicle sales rose 48 percent in June, the biggest jump since February 2006.

Canadian Prime Minister Stephen Harper occupied the middle ground, saying the first priority is to spend wisely what has already been committed.

“Before there’s talk of additional stimulus, I would urge all leaders to focus first on making sure that the stimulus that’s been announced actually gets delivered,” Harper said.

Russia, a G-8 member generally classified as an “emerging” economy, also believes that exit strategies “have to be developed already now,” said Andrei Bokarev, a Russian official.

To contact the reporters on this story: Helene Fouquet in L’Aquila, Italy at hfouquet1@bloomberg.net; James G. Neuger in Rome at jneuger@bloomberg.net